Wednesday, January 31, 2007

Unexpectedly Strong U.S. Growth

Fourth quarter U.S. GDP growth came in a lot faster than what most analysts -including me- expected. While this was only the "advance" number, subject to many revisions, it is just as likely to be upwardly revised as downwardly revised. Personal consumption, business investments, residential investments and inventories came in roughly in line with what I had expected, so the upwards surprise was attributable to the remaining two components: net exports and government demand.

That the trade deficit fell during the fourth quarter was expected given the remarkably low October and November deficits. The Bureau of Economic Analysis apparently expects it to stay as low during December. What was really surprising was that this to such a large extent was attributed to volume changes, rather than just price changes (read: oil price collapse). It remains to be seen whether this will really materialize.

Government spending increased a lot faster than expected. But that was actually not the result of faster nominal spending growth, but a sharp deceleration in the price index for government consumption. Price indexes for government spending are inherently dubious due to the fact that it is determined by a non-market actor, but presumably this deceleration was due to lower oil costs as well.

The oil price collapse, together with other effects from the warm weather was of course the by far most important reason why the U.S economy was so strong despite the housing bust. Oil prices is likely to provide a further -albeit smaller- boost during the first quarter of 2007, despite the recent recovery in oil prices. If it stays this low (or falls further, of course) the U.S. might actually escape a housing-related recession-at least for 2007. The deep imbalances of the U.S. economy means however that this will only represent a postponement of it.

Tuesday, January 30, 2007

Yen Undervaluation Causing Increasing Distortions

Today's economic statistics from Japan were mixed. Industrial production were stronger than expected while consumer spending were weaker than expected. The explanation for these seemingly contradicting statistics is of course the extreme undervaluation of the yen, which have just gotten worse since I first wrote about it. While European currencies and the Chinese yuan and most other Asian currencies have strengthened against the dollar since then,the yen have kept falling even against the dollar (and of course even more so against European and most other Asian currencies).

The weak yen will depress local purchasing power in Japan, while boosting net exports, As a result, Japan's trade- and current account surplus have continued to rise. Note however, that contrary to the misleading "unit labor cost" economics of The Economist, the weak yen have not boosted overall economic growth, just shifted it from domestic demand to net exports. As this shift is very unnatural, it will in fact create economic distortions both in Japan and elsewhere.

Meanwhile, European leaders are starting to complain, noting that Japan's monetary policy creates as much distortions as China's. An increasing number of investors -both Japanese and gaijins- are borrowing at the super-low nominal interest rates in Japan and using it to invest in far higher yielding investments elsewhere.

Monday, January 29, 2007

Paul Krugman On Useless U.S. Ethanol Subsidies

Paul Krugman may be a left-liberal and so I very often disagree with him, but he is right on the mark when pointing out the irrationality of U.S. ethanol policy, which will do little or nothing to reduce oil consumption, while costing the U.S. economy far more than alternative policies to reduce oil consumption. The source of this irrational policy is the parasitical U.S. farm lobby which both the Republican and Democratic establishment panders to. What could be added to Krugman's piece is that the reason Brazilian ethanol isn't used instead of the far more costly U.S. ethanol, is the fact that the U.S. congress, led by Senatar Barack Obama have slapped punitive tariffs on it.

"For those hoping for real action on global warming and energy policy, the State of the Union address was a downer.....

Too bad... The only real substance was Mr. Bush’s call for ... ethanol to replace gasoline. Unfortunately, that’s a really bad idea. There is a place for ethanol in the world’s energy future — but that place is in the tropics. Brazil has managed to replace a lot of its gasoline consumption with ethanol. But Brazil’s ethanol comes from sugar cane.

In the United States, ethanol comes overwhelmingly from corn, a much less suitable raw material. In fact, ... researchers ... estimate that converting the entire U.S. corn crop — the sum of all our ears — into ethanol would replace only 12 percent of our gasoline consumption.

Still, doesn’t every little bit help? Well, this little bit would come at a very high price compared with ... conservation. The Congressional Budget Office estimates that reducing gasoline consumption 10 percent through ... fuel economy standards would cost ... about $3.6 billion a year. Achieving the same result by expanding ethanol production would cost taxpayers at least $10 billion a year...

What’s more, ethanol production has hidden costs. ...[T]he Department of Energy ... says that the net energy savings from replacing a gallon of gasoline with ethanol are only ... about a quarter of a gallon, because of the energy used to grow corn, transport it, run ethanol plants, and so on. And these energy inputs come almost entirely from fossil fuels, so it’s not clear ... ethanol does anything to reduce carbon dioxide emissions....

...Subsidizing ethanol benefits two well-organized groups: corn growers and ethanol producers (especially the corporate giant Archer Daniels Midland). As a result, it’s bad policy with bipartisan support. For example, earlier this month legislation calling for a huge increase in ethanol use was introduced by five senators, of whom four, including ... Barack Obama and Joseph Biden, were Democrats. In a recent town meeting in Iowa, Hillary Clinton managed to mention ethanol twice..."

The Economist And The Euro Zone Economy

The Economistis usually relatively sound on monetary matters, but no so in their latest issue. The Economist Finance and Economics section seems to be made up of a mix of semi-Austrians and Keynesians. This week, it seems, the Keynesians were in charge (as articles aren't signed, we don't know the exact identity of the writer)..

In the article, they argue for a rather crude and naive "unit cost of labor"-theory of growth in which unit labor costs are everything that matters. The recent relative strength of the German economy is supposedly evidence of this. Had they bothered to check their own chart more carefully, they would have noticed that relative German unit labor costs have been as low or nearly as low this for more than five years, yet it is only now that it recovers. And even now, growth is only a tenth of a percentage point above euro zone average. And they failed to noticed how Italy had low growth even in the mid 1990s when unit labor costs were low. Not to mention how fast growers like Ireland and Greece have seen rapid increases in unit labor costs. They did however notice that fast grower Spain have seen such rapid increases, yet they fail to notice how this contradict their growth theory.

The truth is that growth differentials have virtually nothing to with unit labor costs, particularly not in a monetary union for reasons explained below. Instead it depends on demographics and differences in regulatory-, tax- and fiscal policy. Spain, Ireland and Greece is doing well because of favorable demographics and unsound policies while Italy is doing badly because of unfavorable demographics and unsound policies. Germany is a mixed bag, with unfavorable demographics combined with modest liberalizations, which not suprisingly means that it achieves average growth.

Interestingly, The Economist in the past have tried to argue the opposite theory. That lower than average inflation in a monetary union is bad for growth, because it means real interest rates is higher. In June 2003, they predicted (in a article unavailable to non-subscribers) that Germany would forever roast and live unhappily ever after. Now they are arguing that the same conditions means that they will live happily ever after.

The truth is that in a monetary union, above average inflation contains both advantages or disadvantages, likely to cancel each other out. On the one hand, higher unit labor costs will slow growth, on the other hand it will also imply lower real interest rates and lower relative cost of capital goods. The Economist in its bias against monetay unions manages to first make the error of assuming that below average inflation is necessarily bad and the error that above average inflation is necessarily bad. The only thing consistent about its arguments is that they are false and biased against monetary unions.

Sunday, January 28, 2007

U.S. Corporate Profit Growth Decelerating

Chad Hudson reports that one of the more bullish indicators for the U.S. economy, the strong corporate profits, are becoming somewhat less bullish, though still not directly bearish.

"Over the past two weeks, analysts have lowered their estimates for fourth quarter earnings growth. Analysts now forecast earnings for the S&P 500 to have increased 9.1% last quarter compared to 10% growth expected on January 1. This would mark the first quarter since the second quarter of 2003 that earnings failed to grow at a double-digit rate. If companies end up exceeding current estimates and post double-digit gains, it would be 14 consecutive quarter of double-digit earnings growth and beat the previous record of 13 quarters set between the fourth quarter 1992 and the fourth quarter 1995. The financial sector is the major driver for S&P 500 earnings for the fourth quarter. Financial earnings are expected to have grown 34% last quarter. If the financial sector is excluded, the rest of the S&P 500 is expected to have increased earnings by 1.9%. Earnings growth for financial companies are expected to slow to single digits for 2007 and the expected earnings growth for the S&P 500 is similarly muted. "

Monday, January 22, 2007

Arnold Terminates His Honor Too

I've already covered how Arnold Schwarzenegger have terminated his commitment to fiscal sanity and limited government. Now he terminates all previous records in misleading euphenisms for tax increases, as John Fund explains here.

Sunday, January 21, 2007

Weak Yen Key Reason For Japanese Wage Squeeze

One of the seemingly most surprising economic facts are the stagnation in real wages in Japan. While Toyota and other mayor Japanese corporations are seeing rapidly rising profits, real wages have been stagnating. Given the fact that unemployment in Japan is a mere 4,0%, much lower not only than Western Europe, but also lower than in the United States, you would have thought that there would be some upward pressure on wages. But wages have remained weak while corporate profits have boomed. Especially given the shrinking work force, you would have expected employers to bid up wages, but they haven't.

What is the explanation for this apparent puzzle? Well, there are several contributing factors, not just one. One explanation is that the causal relation have been in the other direction, i.e. the wage squeeze have contributed to increased employment. Also, the increase in the relative share of national income going to corporate profits is a global trend caused by the massive increase in the supply of labor from countries like China and India, that we've also seen in the United States and Europe. And as Japan is closer geographically to China and India than the United States and Europe means that the effect is likely to be bigger. On the other hand, Japan's extremely restrictive immigration policy means that no downward pressure on wages from immigrant labor exist.

But one overlooked factor behind the wage squeeze is the weak Japanese yen. The Japanese yen have continued to fall in recent months despite already being undervalued. It is now at multi year lows against not only European currencies, but also against the U.S. dollar and the Chinese yuan.

What does this have to do with the wage squeeze? Well, the falling yen will have a direct positive effect on profit margins of Japanese companies as companies selling finished goods usually at least initially adjust to exchange rate rate changes by adjusting their profit margins rather than their selling prices. However, commodity prices, being traded on global financial markets, usually adjust immediately. And as Japan have virtually no commodity exports, while having a significant commodity content in its import, this will enhance the shift in relative share of national income from labor to capital.

Given the recent meltdown of Bank of Japan authority, it seems as though it is likely that the yen will continue to weaken in the short term despite being fundamentally undervalued.

Saturday, January 20, 2007

Mexico's Government And Corn Prices

Hypocritical politicians aren't exactly a new phenomena, nor is it something limited to Mexico, but Mexico's politicians are now doing everything they can to prove that they aren't an exception to that. For years, Mexico's politicians have attacked the provision in NAFTA that means that Mexico will by 2008 have to do away with the quotas limiting imports of highly subsidized and therefore cheap American corn. Most have viewed it as a necessary evil in order to get the U.S. to dismantle barriers to Mexican exports, while some have argued that it is not worth the prize. But they have all agreed that it is bad. As have some American protectionists who argue that this will increase illegal immigration into the U.S. as the American corn will put Mexican corn farmers out of business.

But while there are many good reasons for opposing U.S. farm subsidies (namely that they hurt American taxpayers and consumers), the idea that it will hurt Mexico is nonsense. While to be sure, Mexican corn farmers will be hurt, the vast majority of Mexicans that aren't farmers will benefit from it as the price of their food is lower and so their purchasing power will be higher. As corn is eaten to a particularly high extent by the poor in Mexico, poor city dwellers will benefit particularly. To the extent that farm subsidies in the U.S. increase illegal immigration, it is because they increase U.S. farm employment where illegal immigrants are disproportionally represented, not because they hurt the Mexican economy.

Now another U.S. subsidy, that on ethanol, is starting to raise corn prices which have meant that the price of corn have risen in Mexico too. Something which have raised protests. The Mexican government have in response to this denounced "price gougers" and will enforce price caps. The narrowly defeated leftist candidate Andres Manuel Lopez Obrador has also seized on this issue and used it as a rallying cry. The fact that both the government and Lopez Obrador have previously denounced the inflow of cheap corn (Lopez Obrador in fact called for NAFTA to be re-negotiated to spare Mexico from cheap U.S. corn) from the U.S. doesn't appear to stop them from denouncing the drying up of the very same inflow.

Friday, January 19, 2007

Global Warming Strengthening the Economy

While we keep hearing from environmentalists about alleged negative effects from global warming, it seems that it can have positive effects. As is explained here,warmer weather might be the main reason for the stronger than expected U.S. economy. This is because warmer weather means that activities supressed by winter weather will take place after all. Moreover -and this is not mentioned in the story- the warmer weather is a key reason for why oil prices have fallen so much, as less heating is needed. Lower oil prices have been a key factor in boosting the purchasing power of U.S. consumers.

Thursday, January 18, 2007

Ahmadinejad Weakening?

Discontent with raving and ranting lunatic Ahmadinejad is apparently rising in Iran. Most Iranians don't care that much about "the Zionist entity" which Ahmadinejad is obsessed with "wiping of the map", much less denying the Holocaust, and care more about rampant inflation and increasing unemployment and poverty. And this is before the full lagged effect of the recent collapse in oil prices. Iran, like all other Mid East countries, except for, of course, "the Zionist Entity", have almost no non-oil exports so falling oil prices will mean a almost proportional decline in its power. However, it remains dubious whether this will weaken the Iranian government enough to prevent its regional domination or a military conflict with "the Great Satan" and/or "the Zionist Entity", especially since it is far from certain that oil prices will continue to decline.

Tuesday, January 16, 2007

Now We Know Why the Bank of England Raised Interest Rates

Analysts were shocked by the surprise rate hike by the Bank of England last week. Now we know the reason for the surprise move. The BoE board had inside information about the inflation numbers released to the public today. The numbers showed that consumer price inflation rose to 3,0% the highest level ever recorded with the EU-harmonized measure that was introduced in 1997, while the retail price index rose to 4,4%, the highest since 1991. More rate hikes might come soon, especially since a mere 0,1% increase in the year over year inflation would mean that BoE governor Mervyn King would be required to pen a letter to Tony Blair explaining why they've failed to keep inflation below 3% and what they intend to do about it.

The continuing collapse in the price of oil might save him from that, but non-energy inflation is clearly spiralling upward in the U.K.

Economic Freedom Index Improved-But Still Imperfect

I see the Heritage Foundation's economic freedom index, which I have previously criticized, have been released again. A quick look at their methodology page reveals they have changed their methodology, interestingly enough largely along the lines of changes I proposed. They haven't adopted all of my proposed changes, but some of them.

For example, they've dropped the ridiculous "informal market" category and replaced it with a labor regulation category, they've dropped the misleading practice of equating change in government spending with the level of it and they've included expropriation in the restriction of property rights category.

Largely as a result of this, Sweden and Denmark is no longer considered to have a low burden of government.

Some shortcomings remain, however. For example they still do not include union imposed minimum wages, even though union power is a product of the state, they still take no notice of forced savings schemes, they take no notice of other effects than consumer price inflation of monetary inflation, they still measure government ownership from share of government revenue coming from state-owned business (which is misleading since this first implies means that lower taxes reduces freedom and second that loss-making state companies is no freedom restriction) and they still take no notice in the index scores of the possible positive effects of corruption in some contexts (i.e., when the alternative is the enforcement of destructive regulation). Moreover, the grades of some of the categories seem rather arbitrary.

What is most curious about the continued inclusion of corruption in the index scores is the fact that in the methodology text they explicitly notices the ambigous effect of corruption on economic freedom. Yet they proceed to ignore it in the actual scoring.

In conclusion: the index is still imperfect, but it is nevertheless greatly improved compared to the previous versions.

Monday, January 15, 2007

Celebrate MLK:s Most Famous Phrase-But Not MLK!

Only one person is currently honored with a separate holiday in America. But it is not the creators of the nation, George Washington and Thomas Jefferson. They have to share their holidays with various mediocre personalities, including history's greatest monster on "President's day". No it is a radical leftist activist by the name of Martin Luther King.

The only good thing he ever contributed with was that legendary "content of character. not color of skin" line, when it comes to judging people. That was indeed a good line, which I myself have quoted, but as that principle is something which any rational individual can come up with him or herself, I wouldn't overestimate his importance in it.

While MLK did oppose the senseless U.S. intervention in the Vietnam War, this was done for the wrong reasons. I.e. , because he rooted for the Vietnamese communists.

What were his shortcomings? Well, that is explained in detail by Marcus Epstein here. Let's just say in short that he was a radical leftist who among other things explicitly, repeatedly and in no uncertain terms favored affirmative action and other racist priviligies for blacks, something which even conservative MLK-advocate Andrew Busch today acknowledges.

Claiming that MLK was an opponent of affirmative action, like the clueless neocon Swedish blogger Dick Erixon claims, is completely false.

Any true anti-racist would celebrate the "content of character, not color of skin" principle. But as MLK himself rejected it in practice, it makes no sense to celebrate him

Sunday, January 14, 2007

Feminist Contradictions

One defining characteristic of feminism and feminists is their contradictions. Indeed, their actual beliefs contradict the word feminism, which presumably would mean enhancing the feminine. But feminists abhor discintly feminine women and want them to become more like men. Not that they're pro-masculine, as they characterise men as oppressors and want men to become more like women. Feminism should instead be re-named to androgynism, as they want no differences to exist between the sexes. As feminism is the established word, I will continue to use it, but really, androgynism would be a more correct word.

I've already covered one example of the contradictions of feminists, when the editorial page of Swedish leftist news paper Aftonbladet, featured articles celebrating the silly "gay pride"-parades in Stockholm this summer side by side with articles rooting for Hamas and Hezbollah, movements which favor death penalty for homosexuality.

In the latest week, more feminist contradictions have appeared. Swedish communist feminist Tora Breitholtz said in the context of discussing abortion that "that women takes the right of deciding over their bodies is more provocative than you think". Indeed it is, for Breitholtz herself vehemently opposes it in other contexts, such as prostitution which she thinks should be illegal. If women have the right of deciding over their bodies, that also means the right to sell sex. But Breitholtz only favors when she thinks it means less "patriarchial oppression".

Similarly, U.S. feminist Senator Barbara Boxer from California attacked U.S. State Secretary Condoleeza Rice for being childless. But as Rush Limbaugh points out, this of course completely contradicts the feminist view that motherhood means subjugation and oppression of women. Feminists should therefore view Rice as a role model for not having children. Boxer's perceived need to use a "Chewbacca Defence" argument against Rice made her forgot feminist ideology. Which is rather curious as there is no need to resort to the "Chewbacca Defence" when arguing against Bush's Iraq policy, as there are many valid arguments that could be used.

Feminists, it seems, views logical coherence as "patriarchial plot".

Saturday, January 13, 2007

"Don't Blame Me-I Voted For Kodos"

Good news. One of the best Simpson-episodes "Citizen Kang" is now available on youtube. This episode was broadcast just before the American presidential election in 1996 starring Bill Clinton and Bob Dole as the two main candidates, and is memorable both because it is funny and satirizes a common fallacy about elections.

In the episode, Homer is abducted by two aliens, Kang and his sister Kodos. His initial reaction is the heroic line "Oh my god, space aliens, don't eat me! I have a wife and kids-eat them!"

When it is clear that they don't want to eat either Homer or his wife and kids, he says "Well, I suppose you want to probe me. Well, we might as well get it over with" and pulls his pants down and moons them. Whereupon Kang and Kodos with obvious disgust says "Stop! We've reached the limits of what recto-probing can teach us." This refers to the stories of some people who claim that they've been abducted by space aliens that the aliens shuvved an anal probe up their butts.

After they've explained that they're on a mission of conquest, they ask for the human leader, whereupon Homer explains that after next week's election, it might be either Bill Clinton or Bob Dole. So Kang and Kodos proceed by first abducting Bob Dole, who reacts by saying "What? Uhh, Bob Dole doesn't need this!" (an obvious reference to his frequent tendency to refer to himself in the third person), and then abduct Bill Clinton, who reacts by saying "What's happening? Is it noon already?". Kang and Kodos then proceed by undressing Dole and Clinton and perform bio-duplication, i.e. transform themselves into looking like Dole and Clinton.

Homer reacts to this by saying: "aliens, bio-duplication, nude conspiracies! Oh my god, Lyndon LaRouche was right!", in a great satire of the nutty conspiracy nature of Lyndon LaRouche and his followers.

After this "Bill Clinton(Kodos)" and "Bob Dole(Kang)" began talking and acting very strange. With "Bill Clinton" saying "I am Klin-ton! As overlord, all will kneel trembling before me and obey my brutal commands! End communication"[Crossing his arms], and with "Bob Dole" answering the question "Senator Dole, why should people vote for you instead of Senator Clinton?" by saying "It makes no difference which one of us you vote for, either way your planet is doomed! DOOMED!!!".

Later when "Bill Clinton" and "Bob Dole" are seen walking along the street holding each other's hands, a Clinton campaign worker tells "Bill Clinton": "Uhh, Mr. President, sir. People are getting a bit confused about the way you and your opponent are, well, constantly holding hands". Whereupon "Bob Dole" answers: "We're merely exchanging long protein strings! If you can think of a simpler way, I'd like to hear it!".

Later, when Homer finally exposes the fact that "Bill Clinton" and "Bob Dole" are exposed as being Kodos and Kang, they say: "It's true, we are aliens, but what are you going to do about it? It's a two party system. You'll have to vote for one of us!". Whereupon a man in the audience says: "I believe I'll vote for a third party candidate!", to which Kodos mockingly replies "Go ahead, throw your vote away!" , with Kang and Kodos laughing and Ross Perot seen destroying his own "Perot 96" hat in frustration.

Then we see Kang's inauguration day as president, where one alien exclaims "All hail, President Kang!", and then images of the alien flag and humans enslaved by aliens to build a ray gun aimed at some unknown planet that presumably is home to a species that are enemies to Kodos' and Kang's species. Marge, who like other humans including Homer is in chains asks "I don't understand why we have to build a ray gun aimed at a planet I've never even heard of?", whereupon Homer remarks "Don't blame me, I voted for Kodos!". As if Kodos wouldn't do the exakt same things as president as Kang.

This is a great satire of the tendency all too many Americans (and others) to vote for some of the established parties, rather than some "third parties" (i.e. parties not considered to have a chance of winning) , even though these "third parties" better reflect their views.

Short-Term U.S. Recession Risks Receding

After the much smaller than expected trade deficit in November, it now seems likely that Q4 2006 growth will end up at more than 2%, rather than the 1-2% I previously expected.

Moreover, the probability of a recession during the first half of 2007 is now declining. Previously, most leading indicators indicated a imminent recession, with the high level of corporate profits being the only anomaly. Now, two new factors makes it unlikely that there will be a recession during the first half of 2007. First, the continued decline in oil prices will continue to boost the purchasing power of American consumers and therefore by extension personal consumption. Secondly, monetary conditions are getting more and more inflationary. Even M2 have expanded at an annual rate of 10,2% during the latest 13 weeks. As the "discontinued" but more accurate money supply measure M3 typically increases even faster, this means that M3 is probably expanding far in excess of 10%. The recent acceleration occurred, not coincidentally, shortly after the Fed decided to pause.

With the short-term boost provided by falling oil prices and accelerating money supply growth, the probability of a recession during the first half of 2007 is certainly less than 50%. That doesn't mean that America have escaped the negative effects of its imbalances, just that they have been postponed. Indeed, the extent to which the increasingly bullish short-term outlook is the result of accelerating money supply growth just means that these imbalances will be aggravated.

Friday, January 12, 2007

Pretty Funny (And Maybe Correct)

One of Sweden's most famous libertarians, Johan Norberg, has become a father. I can only join in on the congratulations. But that was not why I made this post. The reason why I made it was his publication of a really funny (and perhaps correct, I don't know) parental advice received from a reader called Magnus:

"It’s fascinating how quickly my son falls asleep when I read The Economist aloud to him. I recommend it!"

The Economist is arguably the best well-known magazine in the world to adults interested in economics and politics, but perhaps it is not that interesting to small babies......

"Blog Rivelazione"

I don't understand Italian, but a quick google search led me to this online dictionary, which diclosed to me that "blog "rivelazione""
in what seems to be an annual review means "disclosure, revelation, eye opener" [of the year, presumably if it is an annual review). That is what this Italian libertarian thinks of this blog.

Ron Paul For President!

Great news! Ron Paul is going to be a candidate for the Republican Party nomination for president.

Now, being realistic, he has virtually no chance at all of winning due to his "extremism", so had winning the nomination been the only motive for this, it would have been a very much futile waste of time and money. But as a candidate for the Republican nomination, he will be a real pain in the ass for the Republican establishment, particularly since they during debates between the candidates usually include all of the candidates (unlike the debates before the actual Presidential election, where only the Republican and Democratic candidate is allowed to participate), so he will be able to directly confront John McCain, Rudy Guiliani and other statist Republicans with the shortcomings of their policy, just like he was always a pain in the ass for Alan Greenspan, reminding him of his "dark past" in the 1960s during congressional hearings.

Thursday, January 11, 2007

Yuan Rises Above the Hong Kong Dollar

Today, the Chinese yuan reached a higher value than the Hong Kong dollar for the first time since 1994. The yuan is appreciating steadily against the U.S. dollar -albeit at a too slow pace-, while the Hong Kong dollar remains pegged at a rate of 7.80 to the U.S. dollar. This is expected to increase pressure on Hong Kong authorities to tie its currency to the yuan rather than the dollar. As mainland China is a far bigger trading partner to Hong Kong than the U.S., this would seemingly be more natural.

However, to safeguard Hong Kong's position as a regional financial centre, any such move must wait until the yuan has become fully convertible. But when that happens, it would be just as well for Hong Kong to not simply peg the Hong Kong dollar to the yuan, it should in fact abolish the Hong Kong dollar and replace it with the yuan. As Hong Kong monetary authorities would follow the monetary policies of the People's Bank of China anyway, there is no real motive for keeping the Hong Kong dollar, while doing away with it would eliminate transaction costs and increase transparency.

Wednesday, January 10, 2007

Why Increased EITC is Not a Good Idea

After the Democratic victory in last year's congressional elections, a minimum wage increase looks certain to pass the U.S. Congress. While Bush have suggested he might only agree to it if it were combined with tax cuts for small businesses (a combination Democrats reject), I doubt he would actually veto a clean bill (although I hope I'm wrong about that).

Some opponents of an increase in the minimum wage -for example Greg Mankiw- have argued that one should instead help low income workers by raising the so-called "Earned Income Tax Credit(EITC)". The EITC may sound like a form of tax relief, but it is actually a pure government handout (welfare), modeled after Milton Friedman's classic "negative income tax".

While it is true that at least some (but certainly not all) of the recipients of it pay enough of other taxes , like payroll taxes and state and local taxes, to currently be net tax payers, they will certainly be net tax receivers during their entire life, as the payroll taxes the EITC compensates them for gives them social security, plus various othe government hand-outs and services.

While Max Sawicky is a leftist who makes this argument in order to promote the minimum wage increase, he nevertheless makes a lot of good points about the problems of fighting poverty through the EITC.

As he points out, an increased EITC must mean a higher level of received maximum payments from the system. This must imply either that the rate of phase-out (which in effect works as a marginal taxation in terms of effect on incentives) is unchanged and that the final level when the EITC is completely phased out is raised from $38,348 to $58,291, which would be very costly. Or you could increase the phase-out rate dramatically , which would have a disastrous effect on incentives, with the effective marginal taxation raised to 100% in some income spans.

The EITC is thus not the kind of brilliant, super-effective, side-effectless solution to (relative) poverty in America that Greg Mankiw delude themselves into thinking it is. Just like government interventions typically do, the EITC creates negative side effects that arguably is as bad or worse than the problems they allegedly solve.

Tuesday, January 09, 2007

German Trade Surplus Increasing Sharply

Germany's trade surplus increased sharply in November 2006, to €18,5 billion, compared to €13.0 billion the year before. The rise was somewhat smaller, from €10.1 billion to €14.9 billion if you add in services and "supplementary trade items", but the increase is nevertheless dramatic.

This increase is very recent. During the latest 3 months, calendar- and seasonally adjusted exports have risen 8,6%, whereas imports have actually fallen 0,6%. With the year over year increase being roughly €5 billion both October and November, this implies that if this is kept up in December too, net exports will add nearly 3%:points to growth. Which in turn implies that even if domestic demand increases only slowly, German GDP growth will accelerate to a multi year high during Q4 2006. This again confirms what I just wrote about Germany's strong growth momentum.

It also implies that tomorrow's U.S. trade deficit report will show a sharp increase from the relatively low level in October. If you add the $6.5 billion year over year increase in the German trade surplus to the more than $10 billion increase in the Chinese trade surplus, and increases in the trade surpluses of Japan, South Korea and Taiwan you get a total of $20 billion increase. Since trade balances are zero sum games, this means that there has to be a total $20 billion weakening of trade balances elsewhere. While not all of this is likely to be in the U.S., certainly a significant portion of it will come from there.

UPDATE: It seems as though my forecast about the U.S. trade incorrect was incorrect. Indeed, the U.S. deficit was in fact several billion dollars lower than in November 2005. Which leaves us with the question as to where the gap of now $25 billion is to be found. Britain reported a roughly $1 billion in its deficit and Denmark reported a few hundred million dollars in reduced surplus. But that still leaves us with $23-24 billion in statistical discrepancy. That would require implasusibly high deteriorations in other countries' trade balances.

Monday, January 08, 2007

America's High Tax Progressivity

Greg Mankiw tips about a CBO Report which details the total federal taxes (as percentage of income) payed by different groups of tax payers. The result is:

Lowest quintile, 4.5
Second quintile, 10.0
Middle quintile, 13.9
Fourth quintile, 17.2
Highest quintle, 25.1

Top 10 percent, 26.9
Top 5 percent, 28.5
Top 1 percent, 31.1

While the overall level of taxing and spending in America may be lower than in Europe, the level of progressivity (the word "progressivity" here is not related to progress but redistribution) is arguably even higher. This again illustrates that the main reason for differences in inequality is not differences in government redistribution, which often backfires by encouraging low productive individuals to become dependent on the welfare state.

New Possible Pick-Up Line

"Hey baby, I'm about to hold a public speech and feel nervous about it, so could you help me out by having sexual intercourse with me?"

Saturday, January 06, 2007

China Raises Reserve Requirements Again

New blog post on the Mises blog.

Friday, January 05, 2007

Statistics Section of The Economist Changed

I see that The Economist have changed their statistics sections in their latest issue in several ways, mostly positive. First, it has been made public content, instead of being restricted to subscribers of The Economist as in the past. Secondly, they've merged the "emerging markets" section with the main section so that all countries are now shown in a single table. And thirdly, as a result of the second point, there is now more extensive statistics about emerging economies.

The only negative change that I can see is that they seem to have taken away the trade weighted index of currencies of developed countries.

Anyway, We can see that among the countries displayed, Iceland have the lowest official unemployment at just 1,0% (!), whereas South Africa have the highest at 25,6%. Official unemployment rates are often manipulated by governments, both in certain welfare states and in third world countries, but the difference between Iceland and South Africa is probably largely real.

Interestingly, Iceland also has the lowest GDP growth rate at just 0,8%, whereas Latvia have the highest at 11,8%. This illustrates that unemployment is a lagging business cycle indicator. Iceland have an excellent microeconomic structure, one of the best in the world, but its macroeconomics are so messed up that the economy have started to slump.

It's commodity price index also refutes the widespread impression of a commodity price collapse. Yes, the oil price is falling and recently the price of copper and a few other metals have also gone through a correction after the dramatic increase of the last few years. But the all-items index is nearly unchanged (having fallen just 0,7%) for the latest month, and is still up a full 27,1% for the latest year. The fall in metal prices during the latest month have thus been mostly compensated by rising prices of agricultural commodities (both food and non-food). And despite the 6,2% decline of the sub-index for metals during the latest month, it is still up 48,6% for the latest year.

Partiledarval visar socialdemokratins obehagliga essens

En av de riktigt häpnadsväckande sakerna med det socialdemokratiska partiledarvalet är det där med att ingen vågar öppet säga "jag vill bli partiledare". I vissa fall kanske det avspeglar att de verkligen inte vill bli det. Så är exempelvis helt klart fallet med Margot Wallström. I andra fall så avspeglar det dock att det anses ofint att säga det öppet. Istället så är det att socialdemokratin har en djupt rotad pliktetik. Det ska vara "partiet" i så opersonlig och kollektiv bemärkelse som möjligt som "kallar" på en och då ska man uppoffra sig själv i "partiets" och "arbetarrörelsens" namn.

Detta är faktiskt också något som ofta öppet sägs. Lena Hjelm-Wallén, som har ansvaret att få fram en ny partiledare, har när hon tillfrågats om att ingen kommit fram och sagt att de vill bli partiledare svarat att det i socialdemokraterna finns en tradition att partiledarskap är inte något man ska eftersträva utan något man gör för partiets skull.

Och nu säger Arne Kjörnsberg så här: "Partiets uppfattning är alltid större och viktigare än den egna åsikten. En tänkbar kandidat kan ha sagt nej utifrån det egna perspektivet, men när valberedningens ordförande synat alla korten och ändå kommer med den slutgiltiga frågan svarar man ja. Det är en gyllene regel inom partiet"

"Partiet" är allt, dina egna önskningar är inget. Ren jantelag, kollektivism och altruism med andra ord. Fast med tanke på att detta är de saker som kännetecknar socialdemokratins ideologi så är ju det i och för sig bara logiskt att detta är vad som kännetecknar den socialdemokratiska partikulturen.

Kraft Foods European HQ Moves to Low Tax Switzerland

Kraft Foods, the world's second-largest food maker and owner of brands like Toblerone and Marabou is reportedly planning to move its European headquarters to Switzerland (Also the home of the largest food maker, Nestle), presumably because of the low Swiss corporate taxes.

The low Swiss taxes reportedly irritates many EU politicians, with French politician Arnaud Montebourg saying EU should stop the tax "banditry" of some Swiss cantons, presumably with the threats of breaking free trade agreement with Switzerland and slap tariffs on its exports, the same way as they pushed through an "agreement" extorting a billion Swiss Francs per year henceforth from Switzerland recently. It is quite Orwellian to call limiting the amount of money you extort from honest producers "banditry", normally bandits are defined by taking as much as they can.

Thursday, January 04, 2007

German Economy Stronger Than Expected

It increasingly looks as though the German economy will handle the VAT hike that went into effect on January 1st better than expected. First of all because the momentum in the economy is seemingly gathering in strength. Latest sign of this was the sharp drop in unemployment in November and the fact that both manufacturing and non-manufacturing
purchasing manager indexes rose further in December (while falling in France and Italy).

Moreover, as The Economist point out, the effects of the VAT hike will be limited by the fact that first of all only half of all goods and services is affected by it and secondly because payroll taxes (aka "social security contributions") will be reduced, making the effect more limited than I previously estimated in my article on the subject.

Meanwhile, because Germany unlike some other euro-zone countries, like Spain, Ireland and France have not experienced rising house prices and therefore rising household debt, Germany will be hurt a lot less by ECB rate hikes than those countries where house prices have soared.

This means that the short-term outlook for Germany looks a lot brighter than before. First quarter growth will still probably be significantly lowered by the VAT hike, but there is a good chance the economy could recover. Exports could of course be hurt if the euro continues to rise and the American economy falls into a recession, but because of the limited free market reforms of recent years and because Germany is in the early stage of the business cycle, growth will probably stay fairly strong (by German standards).

However, in a longer perspective, growth prospects are weaker because reforms haven't been radical enough and because of demographics (Germany's working age population is shrinking at a rate of roughly 0.5% per year).

Wednesday, January 03, 2007


A doctor of Palestinian origin in Blekinge in Sweden refused to treat an American-for the sole reason that she was an American and because he disliked America's Middle East policies.

But the most remarkable thing about this story is not that a Palestinian discriminated on the basis of nationality in obvious violation of the antidiscrimation rules that doctors have to follow. The most remarkable thing was what the Swedish media wrote about it:

Nothing, nothing at all. Complete media black out. Browsing through the web pages of the 4 biggest news papers in Sweden ( Aftonbladet, Expressen, Dagens Nyheter and Svenska Dagbladet) and the news page of Swedish state radio, I found absolutely nothing about this story. Private Swedish TV-channel TV4 reports about it briefly, but fails to mention the relevant fact that the doctor was of Palestinian origin and did it because he disliked American foreign policy.

The only ones reporting about the incident and all the relevant aspects are, apart from the above link, a few members ( see for example here where I first saw the story ) of the Swedish "right-wing" blogosphere and the American TV-channel Fox News (scroll down).

While I've always considered the Swedish media to have a pro-Palestinian bias, this was shocking even to me. We can be very sure, that had some Swedish doctor refused to treat a Palestinian because he objected to suicide bombings and rocket attacks on Israelis, it would have made frontpage news. Thanks to the Internet though, news are not as easily supressed as in the past by the "mainstream" media.

Tuesday, January 02, 2007

Why Mourn Gerald Ford?

Today, the U.S. has a national day of mourning for recently deceased ex-President Gerald Ford.

Why? What good did he do? I can't bring to mind a single good thing that he did. He may not have been the worst recent President ( Jimmy Carter and George W. Bush immediately comes to mind), but really, Ford didn't do anything good. His most memorable acts were the pardoning of Richard Nixon and the imbecillic "Whip Inflation Now"-buttons (had he really wanted to whip inflation, he would have closed down the Federal Reserve or at least ordered it to greatly restrain its money creation), none of which was really good. So there is no rational reason at all for anyone, except for his family and personal friends, to mourn him.

The fact that such a lacklustre has been is given a national day of mourning after his death indicates a worrisome degree of President-worship, inconsistent with the original American idea of the President as a mere servant of the people, not its ruler.

Monday, January 01, 2007

Great Parody

French demonstrators march in the city of Nantes with signs reading "No to 2007" and "Now is better!". They called for the French government and the UN stop time's "mad race" and declare a moratorium on the future. They also interpreted the rain falling in Nantes on New Year's Eve as a sign that even the weather opposed 2007.

They now plan to go to Paris in December 31st, 2007 and hold a rally against 2008.

This was meant to be a parody of the general French resistance to change and flexibility. A great parody indeed. Given how crazy schemes the French government on its own or via the EU already have in place to prevent change, such as the insane "Common Agricultural Policy" where taxpayers are forced to pay money to make sure food prices will be higher for consumers as well, the ultra-rigid employment laws and protective tariffs against Chinese amd Vietnamese textile imports, and when the entire political establishment then proceeds to blame the economic woes all of this madness have created on insufficient inflation, a moratorium on time only seems slightly crazier. And the rhetoric against "time's mad race" is of course very similar to the rhetoric against the supposedly "mad race" of global capitalism.